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tv   Prime News  HLN  October 5, 2009 4:00am-5:00am EDT

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high sharenow because it is the only source of mortgages were down payment can be less than basically 20% so it is providing mortgage access to a large number of people who could not otherwise by, so i guess you have got public policy goals fãn ' procyclical encouraging financial excesses instead of countering and this gets to the point that has been argued by
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many economists when pyett won the nobel prize when arguing artificially low interest rates lead to the misallocation of bubbles that lee timbers. the degreed the negative dinges trade set by central banks from 2002 to 2006 had a dramatic impact on the boom and the subsequent bust especially when you take into consideration what was already an inflating housing bubble with the drastic steps taken by the federal government to encourage less creditworthy borrowers to get into bonds that could not afford? do you think those combinations could have had an impact on that boom bust? >> we are looking carefully at this question. i think we need to keep an open mind. having said that i think the very strong statement is an overstatement. there are a lot of reasons to think there were other factors involved besides monetary policy
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and i would say secondly that a strong well regulated financial system should not have been crash by an increase and decrease in house prices. and the failures of regulation supervision and oversight allowed this to become as big a deal as it was so i think that is a high priority. >> the gentlewoman from new york. >> thank you mr. chairman. mr. chairman what are some considerations that a systemic regulators should look for to determine what activities and what institutions should be subject to its oversight? >> again, we may be talking about a coordinated effort of the systemic risk council, the fed and so on so it is not clear how the process would work but there are a number of considerations and not just size. for example, what is called interconnectedness, the number of counterparties the firm has
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around the world to-- the complexity of its operations, whether it provides critical services like providing market making or other utilities to the financial system. there are a lot of considerations. >> is it conceivable that private equity firms or venture capital firms could fall under a systemic risk regulator? >> well, my view at this point is that i would not think any hedge fund or private equity fund would become a systemically critical firm individually however it would be important for the systemic risk council to pay attention to the industry and make sure of understood what was going on so there would be some kind of broad based problem that might cut across a lot of friends. >> as we continue to see fallout from this recession one result has been greater consolidation and financial sector.
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our largest banks are now bigger than ever and events from the past year have demonstrated that some financial institutions are indeed too big to fail. what steps could a systemic regulator take to mitigate the continued concentration of risk in a few very large institutions? >> this was a very undesirable side effects of the steps we have to take to protect the system in the short run and as i was discussing earlier i think it is extremely important to address this too big to fail problem and i see several ways to do that. one would be again to in the recognition that these firms if they fail fret not only their own stability and perron creditors but the whole system i think they should be subject to extraordinary oversight including higher capital requirements, and basically stronger supervision.
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secondly one of the big concerns about these large firms is that as too big to fail firms, they are not subject to the discipline of the market because lenders do not believe that the firm would be allowed to fail. i think that has to be eliminated. i would not be satisfied with any resolution authority that did not have a strong mechanism for allowing these firms win being taken over by the government to impose significant losses. not only on shareholders but creditors. my final comment is the federal reserve and approving mergers and the like looks at the monopoly issues and the concentration issues and our view is at least retail services, at the local lover rather than the national level so we always examine whether it is a merger or an expansion of the company, be looking at each of the market areas and tried to make sure that it is not a domination of that region by one
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or two cos. >> mr. chairman i would like to go again back to my first question about institutions and activities were you said that depending on size, but that is kind of day, what do you have in mind in terms of size or when you talk about risks, how much risk and when you talk about interconnectedness, if that means five, 100, 1,000? >> there is then some research in the fed system and elsewhere trying to lay out criteria but to some extent there would have to be a set of principles that the congress would enumerate in terms of what we would be looking at. one of the issues is that which firms are systemically critical may depend to some extent on the state of the broad economy so for example it might have been possible to let certain firms fail with the rest of the economy had been in a healthy
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condition but in a situation where we are in a panic and a recession and so on that may lower the bar in some sense so i can't give the precise numbers. i do think we would owe the congress some careful studies of what the considerations would be, recognizing that they might change over time depending on the state of the financial system. >> thank you. >> the gentlewoman from illinois. >> thank you mr. chairman and thank you chairman bernanke for being here. during previous hearings i best you about the status of the feds work with hud on harmonizing respa and tela, so i think it is particularly important to ensure the consumers have simplified information on disclosures and how were things going with that? >> we agree with you 100% on
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that and we have been trying to work this out for some time. we have recently released some new rules on mortgage disclosures and some of these related issues which bear on the documents that consumers sign when they take out a mortgage and we are in conversations now with hud and i think there is goodwill on both sides to try to come to some agreement that will allow us to eliminate-- eliminate duplication and create a more consistent set of rules between the two constitutions. it has taken a long time because the commitment has waxed and waned but we are working hard to do that and hope to have some results. >> do you think that he will finalize the regulations before respa takes effect? >> we will try to do so. >> okay. under the proposed legislation
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this cfpa has given authority to write to res but and tela rules. if you finalize the rules, if this new agency were to come into effect, i worried than that the new agency would probably start all over again and look at those rules. >> that would be up to the agency. if they thought the rules were not adequate for some reason obviously they would have the right to do that. if i were running this new agency and would try to address what i perceived as the biggest gaps and not revisit a lot of old rulemakings but that would be up to that person. >> thank you. then, if congress over react to this crisis and over regulates for example with the derivatives
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regulation requiring all customize and standardize transactions to be conducted on an exchange, could u.s. business and jobs move overseas? >> i think in general it is very important not to overreact but to create maybe not more regulation but smarter regulation is the way i would put it before. on the case you are talking about i think there is a case for both market efficiency and systemic safety to use clearinghouses and counterparties for standardized contracts but that the same time i think there is a scope for relieving a part of the industry and the more bilateral or non-customize bases i think and there's a good economic reason for that so the appropriate balance would be welcome. >> i hope we don't overreact as we have been some other cases and just one other issue that
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i've heard some concerns about and that is with this cfpa that there is fear that every company really will be included under that and i know you have talked about the statutory authority you have for dealing with the issue, but every company that has any financial transaction that all, even a plumber or a baker or whenever would be under this regulation. do you believe that that could happen or where there have to be legislation to make sure what is actually defines? >> i think the legislation would define that and i understand the chairman has a job that from his current version of the bill but certainly the federal reserve does not have that kind of authority so it would have to be specifically granted to the new agency. >> thank you. i yield back mr. chairman. >> the gentleman from north carolina.
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>> thank you mr. chairman. chairman bernanke let me make this opening comment because sometimes we send subtle messages that obviously are unintended and i've got to this morning the kind of reinforces the concern that i have been expressing for wrote this process. you talk about five different areas that you wanted to comment on. you gave us five sentences on consumer protection and then you referred and response to a question to the minutia of consumer laws. we keep sending this message to the public that this whole issue of consumer protection is secondary to everything else that we are here in bald with,
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and we need to be very careful about that. i am not looking for a response from you but five sentences on consumer protection when everything else that we have talked about this morning get substantially more space is just not a good message to send. referring to consumer laws as the minutia of consumer protection laws is just not a good message to send. let me get to the real question. on page 9, you make this comment on consumer protection. the playing field is uneven regarding examination and enforcement of consumer protection laws among banks and non-bank affiliates of bank holding companies on the one hand and firms not affiliated with banks on the other hand, addressing this discrepancy is
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critical both for protecting consumers and for the other parts of the system. now, my question is, mr. hensarling was asking about these nonbanks. what are the non-bank parts that we are referring to? let's get some of those on the record. >> first i have to say-- >> note, no, that was not intended to triay response mr. bernanke and i have a limited amount of time. >> i disagree with your application. there are many firms that are not-- >> such as? >> mortgage companies, consumer bank companies. >> check cashing, pay the wones? >> for example. >> if we give the regulation on the consumer side to it consumer protection agency of those and
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we give the regulation, retain the regulation of consumer issues and other regulators with the regulated banks, tell me how that doesn't do exactly what you just described here as@@@@@@@ have a consumer protection agency whose sole, primary-- to work every day looking at consumer issues and it is not okay when some other federal agency is involved. it is that what you are saying?
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>> not at all. >> let me just go back and ask this question. you coordinate with other agencies on safety and soundness. other agencies to safety and soundness on various institutions, but they don't come back in answer to the federal reserve, right? >> we coordinate very closely. >> they coordinated very closely and we presume this consumer protection agency would coordinate very closely too. they would be on this council that you keep referring to, wouldn't they? >> yes. >> okay, alright, so how was that any different than the coordination that would take place on safety and soundness? why is it terrible to put this
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responsibility on the consumer protection agency and the allow wit to coordinate when there's a conflict? >> there are different issues here. currently the occ does both consumer complaints and safety and soundness. >> they ain't doing much consumer complaints. >> in theory they are supposed to do consumer compliance and they do both and this would break it up. that is all. >> the gentleman from new jersey. >> thank you mr. chairman. just a couple of questions on areas outside of the regulatory area. mr. royce brought up before he gave you all the stats and the dire prediction with regard to the fha and i just want to delve into that the little bit more. sort of what some lummis are suggesting the legislation i faretta at the beginning to say we should treat them as some of the same requirements that we are asking the rest of wall street and the rest of the financial markets to have skin
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in the game and have proper aspects and also leverage ratios. i think from your answer you are saying there are two issues here. what does congress want to do with regard to housing but what do we want to do to protect the taxpayer. how should we or how can we come down on the one side without harming the other side? >> first the difference in the fha in the gse is the gse has a private debt and private shareholders and that made it more complex in terms of the overall financial system. i think it is undeniable that the fha loans because of the low down payment and so on are riskier than other mortgage is being made and therefore have a greater chance of loss which would be made up by the taxpayer and that tradeoff is your tradeoff in terms of what you think is worth, what christie
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think the government should be taking in order to support the housing market in homeownership. you made the same position on first-time homebuyers tax credit. i don't know how to tell you that. >> can we do it in a way by briefings justice mitch are built to 5% down without having a dramatic impact? >> that would require more study. you can make the conditions of fran kutcher and that reduces the risk to the taxpayer absolutely and reduces the number people viking get mortgages. >> another area is the fdic and what they are facing right now and one of their proposals is going to the bank and saying help us out here. the same sort of dilemma that if the banks will be pushed back and say if you are asking us to do that we will not be able to make our capital level, we are not going to be able to make the
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loan so where is the trade-off in that situation? >> the fdic has tough choices because they are trying to replenish the funds with the creating a procyclical effect without hurting the banking system at a bad time when we want the banking system to be landing. the solution they have even though there would be prepayments by the banks that those prepayments would be treated as assets on the bank balance sheets and therefore capital would not be effective than that is the solution they chose. >> i sort of thought i was reading it that way but i was not sure that they were going to treated that way and really what you are doing is getting a loan from the bank. it is not taking the assets of the balance sheet. so really instead the way i think of it is instead of the fdic coming back and using that line of credit for, instead they are saying we are going to kick the can down the road and barwick from the banks instead and spread it over to them.
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is that the right way to interpret it? >> it is not a loan that requires capital to back it up and therefore in that sense it does not crowd out other lending but there's no good solution there and i know the fdic has really struggled with the right approach. >> from my understanding is that a correct analysis of it? it is just a loan and in one way of looking at it is they are creating money at the same time because you are able to count that dollar twice, once when the fdic is able to handed over to this bank and bill them out in the second time they are going to count that dollar when it is still sitting in the regional bank that loaned the money because they will still be treating it as capital so they can load it to somebody else who you are really counting that dollar twice, aren't you? >> it is basically a loan from the banking system to the fdic which will have to be replaced
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eventually by actual assessments on the bed-- rats of the banking system. >> speaking on the actual assessment on the aspect of the resolution authority and who pays eyes talev not thought nake clear picture on two actually would pay it heaven forbid you have this next scenario and then you assess the to everybody. can you tell us who that would be, how broad is the group of banks that he would be going after or financial institutions and is there potential that they would not be large enough to pay? >> answering a quickly i think there's a lot of unresolved issues that we need to talk about. i think it should be fairly broad. it should exclude insured deposits which are already assessing the size of liabilities that you are going to tax. you should exclude those that are paying deposit insurance premiums. >> the gentleman from new york,
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mr. meeks. >> thank you mr. chairman. mr. chairman let me ask, i think we have to get right is this resolution authority and at listening to some of the testimony yesterday became abundantly clear to me that they would break anybody aaa because they felt the government would bail anybody out but if you get this resolution authority correct everyone will know the government will not bail these folks out and i think that is absolutely one of the most critical pieces we have to work on to get right. that being said what i have been focused on and concerned about the media with resolution authority for example the lehman brothers situation with all the money that is caught up in the u.k., so how and what do we do to come up with a resolution authority to deal with firms like lehman you operations
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headquartered in places in the world so if they go into bankruptcy the process can be quick and efficient. i am not hearing how we are really going to do that in this regard. >> that is a very important question and you are absolutely right. it is tougher because of the global nature. there are companies that are 120 countries around the world. there are some working groups and international bodies which are looking at the cross-border issues and i think what we need to do is have some international agreements or lease some working frameworks that explain how we are going to work together to address this. if we don't do that then what will happen is every country will-- and ultimately we may have a situation where every country will demand its own capital requirements for the subsidiary within its own country and it would be an inefficient way and no doubt to run the system and no doubt will
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reduce the global financial flows in an important way so you have your finger on a very important issue and we need to keep working on that but something has to be done in collaboration with our major partners, typically those like u.k. kneur. >> know of any dialogue where people talk, is that part of that conversation? >> this is being discussed in a lot of contacts including as they said some working groups within the bank regulator groups that meet internationally. >> and, although i know that president obama is calling for a more stable and sustainable global trade system where countries like china and germany are less dependent on export driven growth and the u.s. is less dependent on cheap international capital to finance their deficit driven
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consumption. now, there is talk of the imf playing a more crucial role in monitoring global trade of balances in global financial institutions, but given the strong incentive to sustain the system as it is however unsustainable and volatility is, how do we get there from here? how do we, i don't understand how we get there? it is a difficult problem and we have not made much progress in 15 years ago the imf was given the authority to counsel, to look at the situation in different countries and make recommendations about with no binding power and that didn't have much of an effect on getting more balanced growth across different countries. strategic dialogue with china has been a central issue that we have discussed. i wasn't part of the g-20 meetings in pittsburgh last week but my understanding is there was discussion of a peer review
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system whereby countries would agree to let other countries evaluate whether not they were making progress. if that is the case that would perhaps strengthen the mechanism but it is a very important issue. >> let me get this question in real quick. that is dealing with commercial real-estate. could you give this a quick update on the state of commercial real-estate market and whether it will be a drag on the recovery going forward or is that a systemic risk crisis brewing in which parts of the market to expect will be the most affected by an impending crisis in the real estate area? >> commercial real estate remains a very serious problem. it depends as you understand by category, construction loans are particularly weak. with than other categories, hotels and office buildings and apartment buildings, their differences in the situation but we are concerned but because the fundamentals are weakening and the financing system is that.
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for example the commercial mortgage-backed securities market is still not really open that it could provide a source of a lot of stress particularly for small regional banks that have a heavy concentration for commercial real estate so we are working hard with the banks and we have our talf program which will start the commercial backed-- we will have to watch it carefully. >> the gentleman from georgia. >> thank you mr. chairman. welcome once again. we appreciate you joining us today. want to follow up on the old issue of financial institutions. i think the american people are sick of bailouts and i think we need to respond to that fear and anger on the part of the american people and assured them that there won't be any more. secretary geithner says the rabino fix list for companies that will be built up. are you an agreement with that?
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>> there is nobody more sick and tired of bailouts than me. i think the way the system has to be set up is that when there's the resolution as we have been discussing, that people lose money and the company can be wound down in a safe way. as far as tier 1 is concerned, the idea there would be too, if you do that the designate firms and other ways to do what some of those firms would be tough liquidity and other requirements to make their failure and bailout much less likely. >> mr. chairman? >> we want to have a system that puts the cost on the industry and allows creditors-- >> the question is do you agree with the secretary of treasury that there should be no fix list of companies that would be too big to fail? beith that is a change a thing from the administrations earlier position. i have no problem with sort of a
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sliding scale in the sense of the largest-- >> should there be a fixed list of companies that are identified? >> i am willing to say no except i have one concern which is that outside of the bank holding companies that there are firms which are@d@÷a>,«⌞
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comments about the fdic and the comments made by mr. garrett. it does seem to me as well that they are counting the dollar twice, the prepayment that the fdic is now requiring and continue to use the dollar on their books for assets. is that not some kind of accounting gimmick? >> the banks would have to make this payment at some point in the future any way so they are agreeing to make the payment earlier so it essentially from now until the time when they would have to make the assessment they are essentially making a loan to the fdic. >> they could still use that dollar for other aspects of their own private business, correct? >> yes. >> so they are counting it
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twice. my concern about all that is i think that is not the wisest thing to do but you have said he would like to use the model of the fdic for your own resolution authority. isn't that a flawed model to begin with? >> no, i don't think so and an alternative, the fdic made a decision on how they want to fund as an alternative would be to pay the treasury back with interest. >> when that have been more on this? >> they made a decision based on what they thought would be the least negative effect on the banking system and i don't want to second-guess that. >> any time i counted dollar twice on my books, if i were allowed to do that by law it would be a wonderful thing but it certainly would be more healthy for the economy. bair's discussion about the banning of products. their products out there that are just too risky. you talked a lot about process
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and that the transparency that americans ought to be able to receive when they are evaluating a product that you never talked about a product that was too risky. are you willing to say, are you willing to identify a product that is too risky? >> no-doc loans. >> how long does that list get? >> well it depends on what the industry is proposing but the criteria would be here is a product that is not in the consumers' interests and that-- >> is it the government's role to determine what is in the consumer's interest? >> in some cases i think for a long time the federal reserve believe transparency in disclosure was all that was needed and we have been very much proponents of the point of view but i think there's some circumstances where you know the benefits to the consumer are overwhelmed by the complexity and other aspects that, you know
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are just not worth whatever benefits-- >> the gentleman-- if the people of last you a question that they cannot answer, they cannot come back again. the gentleman from illinois. >> mr. bernanke, good to see you here again this morning. mr. chairman this week the fdic that the special assessment on our nation's banks to help shore up the deposit insurance fund. while is to most of the funds the bin the result of failures of smaller lending institutions these community banks of also suffered from severe decreases in the valleys of housing and commercial real estate markets caused by loans financed by some of the largest banks in our system. i have guo legislation in front of the committee and i would appreciate it if you could take a look at it and write as a note back on your more expansive opinion on it. i would appreciate that and it
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would require the frisbies bank to pay more not only into the fund but also into the systemic risk on. my goal was to create a more efficient pricing regime that would disincentivize banks from remaining to big to fail. what are your recommendations for creating a system that would prevent or discourage banks from becoming too big to fail and what relationship to you think they should have to paying into a fund? do you think there should be differences? >> i discussed a number of methods to avoid too big to fail and it includes tougher supervision and regulation and been subject to this resolution regime, but you point out another dimension which is the assessments that go into the fund either for deposit insurance or for paying for any intervention that does occur. the fdic currently risk adjusts the premiums that they charged
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the bank's deposit insurance. perhaps it is time to revisit that. maybe they are not sufficiently differentiated. i don't know. the same principle would apply to assessments for addressing the special resolution regime and those types of interventions, firms that are larger, more interconnected presumably would pay disproportionately relative to small banks for example so i think that would be a sensible approach. >> thank you. i would appreciate it if you and your staff would review of because it is one of the ways i am looking at making sure. i just kind of thought when i get my insurance if i was speeding or drinking, i had risky behavior in terms of driving my car and i'm going to pay more in insurance and it seems to me we have seen different kinds of behaviors and different components of our financial system and maybe everybody should not pay this so
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i would like to see how we can do this. just one other question. you know, the federal reserve, the chairman, you have these huge responsibilities and to come with this wealth of knowledge to the job that we appreciate as a public servant. and although you have all of these wonderful responsibilities and this wonderful talent you bring to the job i would just like to ask you, what do you think about what we should be looking at in terms of compensation in executive compensation of people, and do you think this congress should do anything about it? out do you look at-- because there is a lot of anger out there as they look at large financial institutions and executive compensation. i went to europe and it was like, as they went from city to city it was in late august with
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mr. kanjorski and we were talking teu members and it was like the most important thing that they were bringing up. could you give us your view? >> as you may know the federal reserve is about to issue guidance for comments on executive compensation which will apply to the literally top five burton executives but way down in the organization to traders are anybody whose activities can affect the risk profile of the company and we view this as a safety and soundness issue and in fact from the institutions themselves, they believe the incentive structures affect safety and soundness. there are two principles. one is the structure of the executive compensation should not be subject to short-term is some or risk-taking and secondly there be a connection between actual performance and pay. the american people don't care if this star baseball player gets paid a lot of money but the same applies in the financial sector but they are upset if
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someone turns a lot of money in their company fails so from a safety and soundness perspective it is important to see those before peelings between performance and they and the federal reserve is falling some international standards fetterman maffei by the stability board which is a group of more than 20 countries that looks at these issues and again. we are looking at the structure of pay, not so much absolute amounts but help pay and performance are related. that is our approach and also there are issues related to transparency and i don't know whether congress wants to do additional things that we are addressing that. >> the gentlewoman from minnesota. >> mr. chairman, thank you. i just wanted to note for the record at the beginning of this hearing the chairman had said not once but twice the president obama had inherited the current financial mess we are dealing with now and while that is true, that is true also of every other president who was ever been here
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but also it is true in the case of senator obama he supported all the spending initiatives all of the bailouts in stimulus plans will he was senator as well so this is an ongoing effort that i hope this committee can again. look gaetan try and turn around for the better of our country in the future so on with my question to mr. bernanke. on monday the president of the world bank, robert zoellick said and i quote the united states would be mistaken to take for granted the dollars place as the world for dominic reserve currency. looking forward there will be increasingly other options to the dollar. i found this statement astounded when i heard him make the-- a statement of this magnitude should concern everyone because replacing the dollar's favorite role in the global marketplace with another country's currency or with a new international currency of some sort i think would be devastating to the soundness of our dollar in their
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nation's currency and our economy. mr. zoellick also claimed the value of the dollar will depend on u.s. choices. s quote with the united states resolve its debt problems without inflation and can america establish long-term discipline over spending in its budget deficit? i would note that mr. bernanke i heard you say before that you are very concerned about inflation. you are not willing to embrace inflation. i derive great comfort from your statement but i do think mr. zoellick's comments are very serious questions he is asking and i think congress needs to address our nation's long-term budget deficit. that is why i join with my colleague, paul hodes, a democrat, i was joining with 21 democrats with a letter that express their concern about the lack of t.a.r.p. transparency in the tax dollars that will remain at risk under the program
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because we believe no more funds should be used for the bank bailouts. i would like to get your comments on mr. zoellick's comments and also the fact that this isn't the first time-- wesley the u.n. called for a new international currency to replace the dollar. china has, russia has, south america has. it is almost like every day there's another article in at this point in light of comments made on monday we should take this very seriously so i would like you to respond to that. another question i have for you mr. bernanke under the chairman's proposal the consumer protection authority will be transferred from other regulatory agencies to the cfpa including authority from the section 45 with jurisdiction only over persons partnerships or corporations organized to carry on business with their profit of their members which means the ftc can't currently
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regulate nonprofits front during deceptive practices so here's my question. would this efta have broad authority to regulate all entities that provide a financial service or product regardless of their tax status meaning of their nonprofit and here's my specific concern. for example is mind standing a.c.o.r.n. provides education service and financial advice to consumers so would a.c.o.r.n. then be regulated under cfpa because this is on a.c.o.r.n.'s web site. they are a nonprofit housing organization that opened a hud sir fannie mae approved housing council office across the united states and hears a quote from the web site. a.c.o.r.n. housing provide one-on-one mortgage counseling, first-time homebuyer classes and helps clients obtain affordable mortgages for unique burtner shiffer kubli look at your savings and credit history to see if you qualify and we can
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help you with credit problems. when you qualify we can arrange a mortgage with lower interest rates, lower down payments and lower settlement costs them mud banks usually offer. it seems to me mr. bernanke from what a.c.o.r.n. claims that they would come under this c fda and i am wondering if he would comment on that. if you would first comment on mr. zoellick's comments and what your feelings are about replacing the dollar as the international currency and then if he would comment also on whether not in your opinion a.c.o.r.n. would be covered by the new cfpa? >> there are only three seconds remaining. >> if i could have my time reclaimed? would this come from my time mr. chairman? >> no, your time-- i will finish for you. there are only three seconds left in your time. i can let him go on for a little
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while but i don't think he can give full answers to both questions and the practice of going up to the and then taking another minute or two is unfair to other members but i can give him 30 seconds to answer as much as he can and the rest dividedã
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large financial institution like lehman brothers are aig could be resolved of the debt holders, shareholders and management would be held accountable before taxpayers that then. as we think of lending to big to fail would provide a more clarity in resolution authority to all stakeholders create the mix of incentives to put pressure on these firms and not get overleveraged and kept to a mormon of low-- mendable size. some people argue that making it public will create competitive disadvantages but doesn't the marketplace already know more less to these large firms are?
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the there are two elements of the proposal. i can reply in writing and be more detail but there to which i fully agree with. one is and as a said before one is there should be a strong presumption that a feeling firm, that the creditors of a feeling firm will lose money. that should be known in the advance. there should be a strong commitment to doing that and that will be an important way of reducing the too big to fail problem. >> others the taxpayer should not bear this costs, that it should be borne by the industry so if you do those two things that i think the dangers of a tier 1 firm, which would not be acceptability didn't do those things because it would be memorializing too big to fail but if you do those things that i think the tier 1 designation is not nearly so worrisome. >> mr. chairman what steps could be taken to ensure federal bank regulators to their job with
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consumer protection? sherman sheila bair proposed cfpa could be given back up authority were they could intervene case-by-case. another idea i might suggest is a stronger use it or lose it at 40 requiring regulators to enforce consumer protection laws are lose that authority. after being greeted by cfpa at bank regulator fails to enforce consumer protection laws should they lose that a 42 cfpa, with this approach and sure regulars to a better job? >> i am not sure the use of our use that approach makes sense in the sense that the agency, which it would be on the agency making that determination. one direction we the backup authority i guess where the agency was on satisfied with specific resolution that it could do that, but that would require them to have the resources and information to do
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that. >> thank you sir and you that my time. >> would the gentleman yield for me? i would like to make a couple of points. mr. bernanke correctly talked about banning some products. you talked about no-doc loans. you talked about no-doc loans. my own view is . these areas that there is a spillover to the system that the no-doc loans was not an individual within apposition but those accumulate into systemic-- so as we talk about whether not keeper habit such practices the argument for doing that gets stronger when there is a systematical for lap. is that an accurate assessment? >> yes and that is why do you would want to have that part of the systemic risk counsel. >> i don't like things to be out there and people get nervous. the gentlewoman from illinois said she hoped there would be no
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banning of opc. there is zero chance of that happening. no one has talked about it and the legislation does not do that. no one is talking about banning the over-the-counter efforts and finally i did want to respond to the gentleman from california who said that congress led to fannie and freddie been 50% in all day and sub-prime. actually was the bush administration that did that in 2004. the bush administration promulgated that and was noted by fannie and freddie to go from the 40's into 54%, from 42% to 54% and specifically to give loans to people below the median and i for one objected. ..
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the average family and retiree and, the investor, but the impact would be on the dollar if it were to lose its currency, some other world leaders are calling for now and the russian president is calling for a super
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currency. if china and south america and everybody went along with that what do you think the impact would be on our country? >> it would weaken the dollar and we would have to watch for inflationary consequences from that but again i want to reiterate that i do see this as a near-term risk so long as we take the appropriate steps to manage our fiscal position and keep inflation low. >> well, i hope we will. we know secretary geithner had to go to china to give them some reassurance and i think they are also calling for this alternative currency. it's not just russia and it's not just south america. china is also very interested and of course you know their roles they play in the body and how were paper and that can be pretty devastating. what do you think the united
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states should do in response to the concerns they have? how are we going to kind of give them assurances to an inflationary level that would spur them forward? >> well, there are two key issues i think. one is inflation and the federal reservists responsible for inflation. we are confident we can manage our policies to support the economy. without inducing inflation and the medium term. so, we are committed to low inflation and we fully believe we have the tools and political will necessary to achieve that. the second issue is about foreign borrowing current trade deficit. as someone earlier mentioned we need a better balance whereby the u.s. saves more, imports
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less, and other countries including china rely more on their domestic demand and exports for their growth and so that is a process, mutual process where both sides have to accommodate that. but from our perspective, the best way to we have to raise the national savings rate over the medium term is to manage our fiscal position because the government deficit is a subtraction from the national savings by reducing the deficit we increase national savings, so that again this year and next year and all the things that have happened i don't think a budget balanced is at all feasible, was certainly over the medium term we need to have a credible plan for returning to budget discipline. >> and the next question was going to be what is the plan. >> well, obviously that is, chris's responsibility, fortunately for me. but certainly i would say as you
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look at these important issues relating to health care, which of course are incredibly important and affect people's lives in many ways that as part of that you take a close look at health care costs, which are a very big part of the expansion of the deficit particularly a decade from now. >> very good. thank you very much. >> the gentleman from california >> thank you, mr. chairman. there is a thinking on wall street the 700 billion was necessary and may be needed in some future emergency as well that we put 700 billion or much larger amount at significant risk and there is a thinking on wall street that congress cannot be trusted to grant extraordinary powers and some future crisis and so we need to modify the statute now so that the executive branch can deploy 700 billion or 1.7 trillion or whatever it is at significant
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risk. section 13-3 has been discussed in your testimony. you indicate that if there was proper resolution of authority that could replace section 13 throop 03. do white understand correctly if we get resolution of 40 white you don't need 13-3 or should the branch could deploy hundreds of billions of dollars? >> if the revolutionary is passed and is a workable plan i don't think the fed would need 13-3 authority for the fed of rescuing failed firms. there could be other contexts it might be useful but in the context of bailing out firms, no. >> what statutory restriction would you want on 13-3 since you say it wouldn't be repealed? >> federal reserve should not be empowered to use 13-3 authority to prevent the failure of a financial firm.
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>> but to perhaps prevent a systemic problem from putting hundreds of billions of dollars at risk or for some other purpose. >> we have other programs for example like when we stepped in to stabilize the commercial paper market, which was sent directly to any firm that was helpful to the economy as a whole. >> looking at 13-3, we have discussed the idea of limiting the dollar amount that you could spend perhaps fishy sisley we discussed 12 trillion. as you know, section 13-3 basically allows you to loan money to anyone so long as there are unusual and exigent circumstances and the key phrase in 13-3 is that you would be secured to the satisfaction of the federal reserve bank. to your credit you've testified that secured to the satisfaction of the federal reserve bank is not some illusory requirement, but instead is the equivalent of
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aaa rated investment. you're general counsel testified last week to a somewhat lesser standard and rios will be holding your possession or his and the years to come. from your general counsel's testimony i would gather some future administration might well extend hundreds of billions of dollars of credit under 13-3 and feel they were adequately secured as long as they were more likely than not to be repaid. that is a junk chung bong standard and since we don't know who's going to hold your position in the future and i can't question them, would you oppose legislation that would define is secured to the satisfaction of the federal reserve bank meant to say that those voting would have to believe that there was a 99% chance that the federal government was going to be fully repaid? >> we are certainly open to
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discussing that. i would like to point out the only case it has been in any way risky has been the individual bailouts and i would like to get rid of those. >> i would point out that we have been blessed to have to let the federal reserve. if someone with the attitude toward statutory construction that we have seen in other parts of the executive branch were in charge of the existing 13-3, they never would have had to have brought t.a.r.p. to the floor of the house. 13-3 could have fully financed the full 700 billion but not on your watch. you have to be on the watch of someone with an aggressive approach to statutory construction. we've seen that aggressive approach of the treasury department and we better modify the statutes unless we can assure all of your successors will be as conservative in their statutory interpretation as you have in. you talk about and


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